Accounting 310 Exam 2 Study Guide
Questions and Answers
Fair Value - answer the amount for which the investment could be bought or sold in a
current transaction between willing parties
Amortization Schedule - answer provides a table format detailing the cash payment
each period, the portions of each cash payment that represent interest and the change
in carrying value, and the balance of the carrying value
Bond - answer A formal debt instrument issued by a company to borrow money. The
issuing company (borrower) is obligated to pay back to the investor (lender): (1) a stated
amount, referred to as the principal or face amount, at a specified maturity date, and (2)
periodic interest payments over the life of the period.
Carrying value for bonds payable - answer the balance in the bonds payable
account, which equals the face value of bonds payable minus the discount or the face
value plus the premium
Amortization - answer Distribution of the cost of an intangible asset over its service
life
Discount on Bond - answer - a bond whose issue price (selling price) is below the
face value
- For a discount bond, the initial carrying value is the face value of the bond minus the
discount at issuance.
Amortization of Discount - answer Each period, a portion of the discount is amortized
and added to the interest expense on the income statement. This reduces the discount
on the bond, effectively increasing the carrying value. The carrying value is calculated
as the initial carrying value plus the amortization of the discount.
Change in Carrying Value of a Discounted Bond - answer The change in carrying
value represents the difference between the current carrying value and the initial
carrying value. For a discount bond, the carrying value increases over time due to the
amortization of the discount.
On January 1, 2024, Splash City issued $310,000 of 9% bonds, due in 20 years, with
interest payable semiannually on June 30 and December 31 each year.
Assuming the market interest rate on the issue date is 10%, the bonds will be issued at
$283,405.
Record the bond issue on January 1, 2024, - answer debit Cash: Represents the
cash Splash City receives from selling the bonds ($283,405).
,debit Discount on Bonds Payable: Represents the difference between the face value of
the bonds and the cash received ($310,000 - $283,405 = $26,595). This discount will be
amortized over the life of the bonds and increase the interest expense.
credit Bonds Payable: Represents the face value of the bonds ($310,000). This is a
liability on the balance sheet representing the company's obligation to repay the
bondholders.
record the first semiannual interest payment on June 30, 2024 - answer Debit
Interest Expense: Represents the interest cost incurred by Splash City for the first six
months. The interest expense is calculated based on the carrying value of the bonds
(face value minus unamortized discount).
Interest expense = Carrying value × (10%/2 market rate semianually) 5.0% Market rate
= 283,405 × 5.0% = 14,170
Credit Discount on Bonds Payable: Represents the amortization of the discount on
bonds payable for the first six months. The discount is gradually reduced over the
bond's life. = 220
Credit Cash: Represents the payment made to bondholders for the interest due.
Cash ($310,000 × 9% × ½) = $13,950
record the second semiannual interest payment on December 31, 2024. - answer
Debit Interest Expense: This represents the interest cost incurred by Splash City for the
second six months.
Interest expense = Carrying value × (10%/2 market rate semianually) 5.0% Market rate
= 283,405 × 5.0% = 14,170
Credit Discount on Bonds Payable: This represents the amortization of the discount on
bonds payable for the second six months.
Credit Cash: Represents the payment made to bondholders for the interest due.
To find the carrying value of a bond, you need to know the initial face value of the bond,
the discount or premium, and the amount of discount or premium amortized up to a
specific point in time. - answer For a bond issued at a discount (where the market
interest rate is higher than the coupon rate), the carrying value increases over time as
the discount is gradually reduced through amortization. For a bond issued at a premium
(where the market interest rate is lower than the coupon rate), the carrying value
decreases over time as the premium is gradually reduced.
How to find the carrying value For a Discount Bond: - answer Carrying Value = Face
Value of the Bond - Total Discount Amortized
To find the total discount amortized, multiply the discount at issuance by the fraction of
the bond's life that has passed. For example, if the bond has a 10-year term and you
want to find the carrying value after 3 years, multiply the initial discount by 3/10.
For a Premium Bond:
Carrying Value = Face Value of the Bond + Total Premium Amortized
To find the total premium amortized, multiply the premium at issuance by the fraction of
the bond's life that has passed. Using the same example as above, if you want to find
the carrying value after 3 years, multiply the initial premium by 3/10.
, How to find the carrying value For a Premium Bond: - answer Carrying Value = Face
Value of the Bond + Total Premium Amortized
To find the total premium amortized, multiply the premium at issuance by the fraction of
the bond's life that has passed. Using the same example as above, if you want to find
the carrying value after 3 years, multiply the initial premium by 3/10.
Additional Paid-In Capital (APIC) - answer Additional Paid-In Capital (APIC) is an
account in the shareholders' equity section of a company's balance sheet. It represents
the amount shareholders have paid for shares in excess of the nominal or par value of
the shares. When a company issues shares, it often receives proceeds above the par
value per share. The difference between the issue price and the par value is recorded in
the additional paid-in capital account.
Here's how the calculation typically works:
APIC=(Issue Price per Share−Par Value per Share)×Number of Shares
IssuedAPIC=(Issue Price per Share−Par Value per Share)×Number of Shares Issued
For example, if a company issues 10,000 shares with a par value of $1 per share, but
the shares are sold to investors at $10 each, the additional paid-in capital would be:
APIC=($10−$1)×10,000=$90,000APIC=($10−$1)×10,000=$90,000
APIC can also include other forms of capital contributed by shareholders, such as
proceeds from stock options exercised, contributions from stoc
CONTINUED ON: Lodge Outfitters issues 2,500 shares of its $0.01 par value common
stock to provide funds for further expansion. Assuming the issue price is $13 per share,
record the issuance of common stock. - answer Cash (Debit): The company receives
cash from the sale of the common stock. In this example, the company receives $13 per
share for 2,500 shares, so the total cash received is $32,500. Debiting cash increases
the company's assets.
Cash Debit=$32,500
Common Stock (Credit): The Common Stock account is credited with the par value of
the shares issued. In this case, 2,500 shares with a par value of $0.01 each results in a
total par value of $25.
Common Stock Credit=$25
Additional Paid-in Capital (Credit): The Additional Paid-in Capital account is credited
with the excess amount received above the par value. In this case, the issue price is
$13 per share, so the excess amount per share is $13 - $0.01 = $12.99. Multiplying this
excess amount by the number of shares issued (2,500 shares) results in $32,475.
Additional Paid-in Capital Credit=$32,475
par value - answer Par value, also known as face value or nominal value, is the
nominal or dollar value of a security stated by the issuer. For stocks, it is the minimum
price at which a company's shares can be issued when first offered on the market. For
bonds, it represents the amount that the issuer promises to repay to the bondholder
when the bond matures.
